http://www.final-yearprojects.co.cc/
http://troubleshoot4free.com/fyp/
One place for Projects, Presentation, seminar, summer training
report and lot more.
NOTE:-This work is copyright to its Authors. This is only for
Educational Purpose.
EXECUTIVE SUMMARY
The project is about Treasury management operations in banks.
Treasury management is the management of an organizations liquidity
to ensure that the right amount of cash resources are available in
the right place in the right currency and at the right time in such
a way as to maximize the return on surplus funds, minimize the
financing cost of the business, and control interest rate risk and
currency exposure to an acceptable level.
This project covers functions of treasury management operations
in banks, organizational structure of treasury, objectives and
functions of treasurer which plays an important role in banks.
The project also involves the elements in treasury management
like cash reserve ratio, statutory liquidity ratio, dates
government securities, etc. which should be properly functioned by
treasurer.
The project includes nature of treasury assets and liabilities
and treasury products & services which plays an important role
in very banks.
The project deals with risk involved in these treasury assets
and liabilities and their mitigation. Risks are of two types
operational risk & financial risk. The project also includes
risk management guidelines which are laid down by RBI.
The project covers the future scope / challenges in treasury
management, role of information technology in treasury management
and a study on SBIs treasury.
INTRODUCTION
In general terms and from the perspective of commercial banking,
treasury refers to the fund and revenue at the possession of the
bank and day-to-day management of the same. Idle funds are usually
source of loss, real or opportune, and, thereby need to be managed,
invested, and deployed with intent to improve profitability. There
is no profit or reward without attendant risk. Thus treasury
operations seek to maximize profit and earning by investing
available funds at an acceptable level of risks. Returns and risks
both need to be managed. If we examine the balance sheets of
Commercial Banks (Public Sector Banks, typically), we find
investment/deposit ratio has by far overtaken credit/deposit ratio.
Interest income from investments has overtaken interest income from
loans/advances. The special feature of such bloated portfolio is
that more than 85% of it is invested in government securities.
The reasons for such developments appear to be as under:
?Poor credit off-take coupled with high increase in NPAs.
?Banks' reluctance to cut-down the size of their balance
sheets.
?Government's aggressive role in lowering cost of debt,
resulting in high inventory profit to commercial banks.
?Capital adequacy requirements.
?The income flow from investment assets is real compared to that
of loan-assets, as the latter is size ably a book-entry.
In this context, treasury operations are becoming more and more
important to the banks and a need for integration, both horizontal
and vertical, has come to the attention of the corporate. The basic
purpose of integration is to improve portfolio profitability,
risk-insulation and also to synergize banking assets with trading
assets. In horizontal integration, dealing/trading rooms engaged in
the same trading activity are brought under same policy,
technological and accounting platform, while in vertical
integration, all existing and diverse trading and arbitrage
activities are brought under one control with one common pool of
funding and contributions.
MEANING AND DEFINITION
Meaning:
Treasury is the glue binding together liquidity management,
asset/liability management, capital requirements and risk
management. It has an increasingly important job to do. At one end
of the spectrum it manages balance sheets and liquidity, and does
good things to enhance the yield on assets and minimize the cost of
liabilities, mostly through the clever and intelligent use of
derivatives. At the other end of the spectrum, treasury can help
restructure the balance sheet and provide new products.
All banks have departments devoted to treasury management, as do
larger corporations. Treasury management modules are available for
many larger enterprise software systems. Banks do not disclose the
prices they charge for Treasury Management products.
Definition:
Treasury management is the management of an organizations
liquidity to ensure that the right amount of cash resources are
available in the right place in the right currency and at the right
time in such a way as to maximize the return on surplus funds,
minimize the financing cost of the business, and control interest
rate risk and currency exposure to an acceptable level.
In other words,Treasury management (or treasury operations)
includes management of an enterprise' holdings in and trading in
government and corporate bonds, currencies, financial futures,
options and derivatives, payment systems and the associated
financial risk management.
Integrated Treasury:
We see integration of segmented financial markets- money market,
debt and capital market and forex market, etc., at the macro level
and integration of treasury operations at the operational level of
banks. The term integration means merger or centralization or
consolidation. The reforms that were initiated in 90s made domestic
markets closely linked to global markets. The domestic market is
integration with global market at the micro level, which has raised
the need for integration of micro level units. Relaxation of
regulations has almost integrated different segments of financial
markets- debt market, money market, capital market, forex market,
etc., which enabled free flow of money from one market to another.
Increased demands from their clients in tandem with high
competition forced banks to operate in all these markets. Once
capital account convertibility is fully materialized, the markets
will become fully integrated.
OBJECTIVE OF THE STUDY
The objective of undertaking a project on Treasury Management
operations in banks is to have in-depth knowledge about the meaning
of Treasury Management.
To know about the functions, organizational structure and
objective of Treasury Management in Banks.
To understand the elements of Treasury Management and the
functions of treasurer.
To have a broader view on nature of treasury assets &
liabilities and to know what are their products and services
involved in Treasury Management.
To understand the risk associated with Treasury Management and
their mitigation.
To know what are the RBI guidelines formulated for Treasury
Management.
To know the future scope involved in Treasury Management &
role of information technology in Treasury Management.
To have an in-depth knowledge of how SBI manages its treasury as
SBI is the major contributors in money and forex market.
RESEARCH METHODOLOGY
Gathering primary data through meeting key officials from the
related area of Treasury Management, collecting view points from
them to arrive at meaningful conclusion.
Gathering secondary data from books, periodicals, publications,
newspaper, survey reports, journals, websites, and internal
website.
Conducting interview with appropriate officials relating to the
field of Treasury Management by designing appropriate
questionnaires.
TREASURY MANAGEMENT: AN OVERVIEW
Webster defines treasury as "a place where stores of treasures
are kept; the place of deposit, care, and disbursement of collected
funds." Moreover, if one considers the treasury functions in ones
own organization; this definition would most likely broadly
describe it. Treasury and its responsibilities fall under the scope
of the Chief Financial Officer. In many organizations, the
Treasurer will be responsible for the treasury function and also
holds the position of Chief Financial Officer. The CFO's
responsibilities usually include capital management, risk
management, strategic planning, investor relations and financial
reporting. In larger organizations, these responsibilities are
usually separated between accounting and treasury, with the
controller and the treasurer each leading a functional area.
Generally accepted accounting principles and generally accepted
auditing standards recommend the division of responsibilities in
areas of cash control and processing.
The specific tasks of a typical treasury function include cash
management, risk management, hedging and insurance management,
accounts receivable management, accounts payable management, bank
relations and investor relations.
Following is a description of each of these tasks:
(a)Cash Management includes the control and care of the cash
assets and liabilities of the organization. This will include the
selection of banks and bank accounts, investment vehicles,
investment brokers, methods of borrowing, cash management
information systems, and the development and compliance with cash
and investment policy and processes. All of these pieces of the
cash management puzzle need to be coordinated and documented in a
procedural manual in order to control the risk associated with
cash.
(b)Risk Management includes customer credit management,
vendor/contractor financial analysis, liability claims management,
business disaster recovery, and employee benefits program risk..
There are many risks associated with employee benefit plans, and
treasury should be an integral part of this process in order to
mitigate and control this risk.
(c)Insurance Management is the process of negotiation of
insurance policies to mitigate the risks that the organization does
not want to assume. The normal types of insurance that are usually
obtained are General Liability, Workers' Compensation, Automobile,
Director & Officers Liability, Fiduciary Liability, Employment
Practices Liability, Crime & Theft (Securities), Property,
Transportation and Surety Bonds. Some companies substitute
self-insurance or captive insurance companies for some of this
risk. If the organization does not employ a full-time licensed
insurance manager, they usually retain an insurance broker to
advice on insurance issues and obtain insurance in the open market.
Another method of risk mitigation is through hedging; this is
normally used for foreign exchange, interest rates and purchase of
raw materials.
(d)Accounts Receivable Management includes the control of cash
receipt systems within the organization. This involves the
management of customer disputes and deductions, collections, and
the systems and processes for control of accounts receivable. It
will usually include the establishment of credit card/purchasing
card settlement systems.
(e)Accounts Payable Management includes the control of the cash
disbursement process. This function will include vendor relations,
disputes and negotiation of the disputes, and the systems and
processes for control of accounts payable to conserve cash while
maintaining positive vendor relationships.
(f)Bank Relations is that function which is a delicate balancing
act due to the normal practice of having more than one lender
involved in most credit arrangements, and meeting their needs for
services and information from your organization. These lenders must
be considered a partner to your business and must be treated
fairly.
(g)Investor Relations is that area of treasury's
responsibilities that can have a great effect on the value of
publicly traded organizations. To provide expedient processing of
stock trades, a competent shareholder service provider should be
retained by the organization.
A successful treasury function has the same attributes as any
other function within the organization that is considered
successful. These qualities are:
* Teamwork
* Respect for Organization
* Forward Thinking
* Global Thinking
* Technological Advancement
* Customer Focused
* Finance/Accounting Knowledge
* Legal Knowledge
* Reliability
The treasury function must work with all operations within the
organization. The operational functions they are working with
should consider treasury to be an internal consultant, with
expertise in risk and finance.
Treasury is an exciting and interesting function of the
organization that gets involved in many diverse areas of the
business that most other positions in the company do not get the
opportunity to be involved in. It is a natural progression in the
career of many who start out in credit management.
FUNCTIONS OF TREASURY DEPARTMENT IN BANKS
Since 1990s, the prime movers of financial intermediaries and
services have been the policies of globalization and reforms. All
players and regulators had been actively participating, only with
variation of the degree of participation, to globalize the economy.
With burgeoning forex reserves, Indian banks and Financial
Institutions have no alternative but to be directly affected by
global happenings and trades. This is where; integrated treasury
operations have emerged as a basic tool for key financial
performance.
A treasury department of a bank is concerned with the following
functions:
(a)Reserve Management & Investment: It involves (i) meeting
CRR/SLR obligations, (ii) having an appropriate mix of investment
portfolio to optimise yield and duration. Duration is the weighted
average life of a debt instrument over which investment in that
instrument is recouped. Duration Analysis is used as a tool to
monitor the price sensitivity of an investment instrument to
interest rate charges.
(b)Liquidity & Funds Management: It involves (i) analysis of
major cash flows arising out of asset-liability transactions (ii)
providing a balanced and well-diversified liability base to fund
the various assets in the balance sheet of the bank (iii) providing
policy inputs to strategic planning group of the bank on funding
mix (currency, tenor & cost) and yield expected in credit and
investment.
(c)Asset Liability Management & Term Money: ALM calls for
determining the optimal size and growth rate of the balance sheet
and also prices the Assets and liabilities in accordance with
prescribed guidelines. Successive reduction in CRR rates and ALM
practices by banks increase the demand for funds for tenor of above
15 days (Term Money) to match duration of their assets.
(d)Risk Management: integrated treasury manages all market risks
associated with a banks liabilities and assets. The market risk of
liabilities pertains to floating interest rate risk for assets
& liability mismatches. The market risk for assets can arise
from (i) unfavorable change in interest rates (ii) increasing
levels of disintermediation (iii) securitization of assets (iv)
emergence of credit derivates etc. while the credit risk assessment
continues to rest with Credit Department, the Treasury would
monitor the cash inflow impact from changes in assets prices due to
interest rate changes by adhering to prudential exposure
limits.
(e)Transfer Pricing: Treasury is to ensure that the funds of the
bank are deployed optimally, without sacrificing yield or
liquidity. An integrated Treasury unit has as idea of the banks
overall funding needs as well as direct access to various market (
like money market, capital market, forex market, credit market).
Hence, ideally treasury should provide benchmark rates, after
assuming market risk, to various business groups and product
categories about the correct business strategy to adopt.
(f)Derivative Products: Treasury can develop Interest Rate Swap
(IRS) and other Rupee based/ cross- currency derivative products
for hedging Banks own exposures and also sell such products to
customers/other banks.
(g)Arbitrage: Treasury units of banks undertake this by
simultaneous buying and selling of the same type of assets in two
different markets to make risk-less profits.
(h)Capital Adequacy: This function focuses on quality of assets,
with Return on Assets (ROA) being a key criterion for measuring the
efficiency of deployed funds. An integrated treasury is a major
profit centre. It has its own P&L measurement. It undertakes
exposures through proprietary trading (deals done to make profits
out of movements in market interest/ exchange rates) that may not
be required for general banking.
(i)Coordination: Banks do operate at more than one money market
centers. All the centers undertake similar transactions with
differing volumes. There is a need to coordinate the activities of
these centers so that aberrations are avoided (situations where one
center is lending and the other one is borrowing at the same time).
The task of coordination of foreign exchanges positions is no
different.
(j)Control and Development: Treasury operates as the focal point
of dealing operations. Dealing operations could include cash/spot,
forward, futures, options, interest and currency liability swaps,
forward rate agreements and the like. Treasury is the sole owner
and performer of these transactions.
(k)Fraud Protection: The decade of nineties has witnessed more
frauds in trading than banking books. The amount and variety of
such embezzlements have been directly relatable to the operational
level. The ground level task of this kind is to be undertaken at
the treasury.
All the aforesaid activities are funds management functions in a
banking environment.
ORGANISATIONAL STRUCTURE OF TREASURY
There is no standard structure for treasury department of a
bank. Depending on the responsibilities assigned and power
delegated, it can be aptly structured. Typically, banks maintain
three independent tiers at the functional/operational level-
Tier I Dealing Desk (Front Office): The dealers and traders in
different markets- money, stock, debt, commodity, derivatives and
forex- operate in their respective areas. They are the first point
if interface with other participants in the market. The number of
dealers depends on the size and frequency of the operations. In
case of larger in each bank, operations would be carried out by
separate and independent set of dealers in each market. But, for a
relatively smaller treasury, operations would be done by one or
more dealers jointly in all the markets.
Tier II Settlement Desk (Back Office): Once the deals are
concluded, it is for the back office to process and settle the
deals. Indeed, the back office undertakes settlement and
reconciliation operations.
Tier III Accounting, Monitoring and Reporting Office (Audit
group): This department looks after the activities relating to
accounting, auditing and reporting. Accountants record all deals in
the books of accounts, while auditors and inspectors closely
monitor all deals and transactions done by the front and the back
office, and send regular reports to authorities concerned. This
department independently inspects daily operations in the treasury
department to ensure internal/regulatory system and procedures.
The three departments should be compartmentalized and they act
independently. The heads of each section reports directly to the
Head of the Treasury. A treasury can have more functional desk
depending on the size and structure of the bank, and activities
undertaken by the bank. For example, the treasury may have separate
individuals/managers for monitoring funds movement, for monitoring
of risks, developing and marketing innovative
instruments/products.
OBJECTIVES OF THE TREASURY MANAGEMENT
Treasury of a commercial bank undertakes various operations in
fulfillment of the following objectives:
To take advantage of the attractive trading and arbitrage
opportunities in the bond and forex markets.
To deploy and invest the deposit liabilities, internal
generation and cash flows from maturing assets for maximum return
on a current and forward basis consistent with the banks risk
policies/appetite.
To fund the balance sheet on current and forward basis as
cheaply as possible taking into account the marginal impact of
these actions.
To effectively manage the forex assets and liabilities of the
bank.
To manage and contain the treasury risks of the bank within the
approved and prudential norms of the bank and regulatory
authorities.
To assess, advise and manage the financial risks associated with
the non-treasury assets and liabilities of the bank
To adopt the best practices in dealing, clearing, settlement and
risk management in treasury operations.
To maintain statutory reserves- CRR and SLR- as mandated by the
RBI on current and forward planning basis.
To deploy profitably and without compromising liquidity the
clearing surpluses of the bank
To identify and borrow on the best terms from the market to meet
the clearing deficits of the bank
To offer comprehensive value-added treasury and related services
to the banks customers
To act as profit center for the bank.
ELEMENTS OF TREASURY MANAGEMENT
1. Cash Reserve Ratio/Statutory Liquidity Ratio Management: CRR,
or cash reserve ratio, refers to the portion of deposits that banks
have to maintain with RBI. This serves two purposes. First, it
ensures that a portion of bank deposits is totally risk-free.
Second, it enables RBI control liquidity in the system, and
thereby, inflation. Besides CRR, banks are required to invest a
portion (8.25 per cent now) of their deposits in government
securities as a part of their statutory liquidity ratio (SLR)
requirements. The government securities (also known as gilt-edged
securities or gilts) are bonds issued by the Central government to
meet its revenue requirements. Although the bonds are long-term in
nature, they are liquid as they have a ready secondary market.
2. Dated Government Securities: The Government securities
comprise dated securities issued by the Government of India and
state governments. The date of maturity is specified in the
securities therefore it is known as dated government
securities.
a)The Government borrows funds through the issue of long
term-dated securities, the lowest risk category instruments in the
economy. These securities are issued through auctions conducted by
RBI, where the central bank decides the coupon or discount rate
based on the response received. Most of these securities are issued
as fixed interest bearing securities, though the government
sometimes issues zero coupon instruments and floating rate
securities also. In one of its first moves to deregulate interest
rates in the economy, RBI adopted the market driven auction method
in FY 1991-92. Since then, the interest in government securities
has gone up tremendously and trading in these securities has been
quite active. They are not generally in the form of securities but
in the form of entries in RBI's Subsidiary General Ledger
(SGL).
b)The investors in government securities are mainly banks, FIs,
insurance companies, provident funds and trusts. These investors
are required to hold a certain part of their investments or
liabilities in government paper. Foreign institutional investors
can also invest in these securities up to 100% of funds-in case of
dedicated debt funds and 49% in case of equity funds.
c)Till recently, a few of the domestic players used to trade in
these securities with a majority investing in these instruments for
the full term. This has been changing of late, with a good number
of banks setting up active treasuries to trade in these securities.
Perhaps the most liquid of the long term instruments, liquidity in
gilts is also aided by the primary dealer network set up by RBI and
RBI's own open market operations.
1. Money Market Operations: The bank engages into a number of
instruments that are available in the Indian money market for the
purpose of enhancing liquidity as well as profitability. Some of
these instruments are as follows:
A.Call Money Market
Call/Notice money is an amount borrowed or lent on demand for a
very short period. If the period is more than one day and up to 14
days it is called 'Notice money' otherwise the amount is known as
Call money'. Intervening holidays and/or Sundays are excluded for
this purpose. No collateral security is required to cover these
transactions.
B.Treasury Bills Market
In the short term, the lowest risk category instruments are the
treasury bills. RBI issues these at a prefixed day and a fixed
amount.
There are four types of treasury bills:-
14-day T-bill - maturity is in 14 days. Its auction is on every
Friday of every week. The notified amount for this auction is Rs.
100 cr.
91-day T-bill - maturity is in 91 days. Its auction is on every
Friday of every week. The notified amount for this auction is Rs.
100 cr.
182-day T-bill - maturity is in 182 days. Its auction is on
every alternate Wednesday (which is not a reporting week). The
notified amount for this auction is Rs. 100 cr.
364-Day T-bill - maturity is in 364 days. Its auction is on
every alternate Wednesday (which is a reporting week). The notified
amount for this auction is Rs. 500 cr.
C. Inter-Bank Term Money
Inter bank market for deposits of maturity beyond 14 days and up
to three months is referred to as the term money market. The
specified entities are not allowed to lend beyond 14 days. The
market in this segment is presently not very deep. The declining
spread in lending operations, the volatility in the call money
market with accompanying risks in running asset/liability
mismatches, the growing desire for fixed interest rate borrowing by
corporate, the move towards fuller integration between forex and
money markets, etc. are all the driving forces for the development
of the term money market. These, coupled with the proposals for
Nationalization of reserve requirements and stringent guidelines by
regulators/managements of institutions, in the asset/liability and
interest rate risk management, should stimulate the evolution of
term money market sooner than later. The DFHI, as a major player in
the market, is putting in all efforts to activate this market.
The development of the term money market is inevitable due to
the following reasons
Declining spread in lending operations
Volatility in the call money market
Growing desire for fixed interest rates borrowing by
corporate
Move towards fuller integration between forex and money
market
Stringent guidelines by regulators/management of the
institutions
D.Certificates of Deposits
The scheduled commercial banks have been permitted to issue
certificate of deposit without any regulation on interest rates.
This is also a money market instrument and unlike a fixed deposit
receipt, it is a negotiable instrument and hence it offers maximum
liquidity. As such, it has secondary market too. Since the
denomination is very high, it is suitable to mainly institutional
investors and companies.
E.Commercial Paper (CP)
Commercial Paper (CP) is an unsecured money market instrument
issued in the form of a promissory note. CP was introduced in India
in 1990 with a view to enabling highly rated corporate borrowers to
diversify their sources of short-term borrowings and to provide an
additional instrument to investors.
Highly rated corporate borrowers, primary dealers (PDs) and
satellite dealers (SDs) and all-India financial institutions (FIs)
which have been permitted to raise resources through money market
instruments under the umbrella limit fixed by Reserve Bank of India
are eligible to issue CP.
A company shall be eligible to issue CP provided - (a) the
tangible net worth of the company, as per the latest audited
balance sheet, is not less than Rs. 4 crore; (b) the working
capital (fund-based) limit of the company from the banking system
is not less than Rs.4 crore and (c) the borrower account of the
company is classified as a Standard Asset by the financing
bank/s.
F.Ready Forward Contracts
It is a transaction in which two parties agree to sell and
repurchase the same security. Under such an agreement the seller
sells specified securities with an agreement to repurchase the same
at a mutually decided future date and a price. Similarly, the buyer
purchases the securities with an agreement to resell the same to
the seller on an agreed date in future at a predetermined price.
Such a transaction is called a Repo when viewed from the
prospective of the seller of securities (the party acquiring fund)
and Reverse Repo when described from the point of view of the
supplier of funds. Thus, whether a given agreement is termed as
Repo or a Reverse Repo depends on which party initiated the
transaction.
G. Commercial Bills
Bills of exchange are negotiable instruments drawn by the seller
(drawer) of the goods on the buyer (drawee) of the goods for the
value of the goods delivered. These bills are called trade bills.
These trade bills are called commercial bills when they are
accepted by commercial banks. If the bill is payable at a future
date and the seller needs money during the currency of the bill
then he may approach his bank for discounting the bill. The
maturity proceeds or face value of discounted bill, from the
drawee, will be received by the bank. If the bank needs fund during
the currency of the bill then it can rediscount the bill already
discounted by it in the commercial bill rediscount market at the
market related discount rate.
The RBI introduced the Bills Market scheme (BMS) in 1952 and the
scheme was later modified into New Bills Market scheme (NBMS) in
1970. Under the scheme, commercial banks can rediscount the bills,
which were originally discounted by them, with approved
institutions (viz., Commercial Banks, Development Financial
Institutions, Mutual Funds, Primary Dealer, etc.).
With the intention of reducing paper movements and facilitate
multiple rediscounting, the RBI introduced an instrument called
Derivative Usance Promissory Notes (DUPN). So the need for physical
transfer of bills has been waived and the bank that originally
discounts the bills only draws DUPN. These DUPNs are sold to
investors in convenient lots of maturities (from 15 days upto 90
days) on the basis of genuine trade bills, discounted by the
discounting bank.
FUNCTIONS OF A TREASUER
The Treasury in the finance department Deals with the liquid
assets; since the treasurer is the head of the treasury, he has a
major responsibility of being a custodian of cash and other liquid
assets. The other functions are:
(a)Funding: The treasurer has the responsibility of exploring
and selecting best source of finance for funding long-and short
term cash requirements of the business. While determining the best
source of finance, the treasurer must take various matters into
consideration like debt structure of the organization, structure of
the debt portfolio, and advantages and shortcoming of short-and
long term financing, etc.
(b) Working Capital Management: The goal of the working capital
management is to maintain good balance between current assets and
liabilities as per the requirements of the business. Since cash
surplus as well as cash deficit is not recommendable for and
organization, the treasurer has the responsibility to maintain an
optimum cash level. A good working capital management maximizes the
liquidity and profitability of the organization.
(c) Better Investor Relations: This involves establishing,
strengthening and maintaining better interaction with interested
members of the financing and investing community such as:
Individual investors,
Institutional investors,
Professional Fund Managers, and
Foreign Investors etc.
(d)Good Banking Relationships: in general, selection of
appropriate, desirable and suitable banking services is the
responsibility of the individuals responsible for cash management,
who fall under the treasury belt. This includes cash transmission
and bank account and bank relationship management.
(e)Short-term Investments: Idle cash incurs opportunity costs as
time passes. The excessive surplus cash in the business may arise
due to various factors such as cyclical, seasonal to temporary
business trends. The treasurer has the authority to utilize surplus
cash of the organization in short-term beneficial investments.
(f)Risk (Hedging) and Forex Management: due to increasing
globalization of business, the importance of risk and forex
management has been spurring. The international treasurer has to
ensure liquidity in foreign exchange funds without compromising
profitability. On the other hand, risk management (hedging)
involves the utilization of financial instruments to cushion the
company against interest rate, commodity and currency
exposures.
(g)Establishing the Company Policy: Functions of the treasurer,
further includes establishing of company policy with respect to
decision on trade discounts and vendor payment ageing.
(h)Capital Structure Formulation: The treasurer must formulate
the capital structure for the organization in accordance to
business goals and implement the same. He has the responsibility of
taking appropriate debt vs. equity financing decisions. A wrong or
inappropriate capital structure decision may through the business
into irrecoverable losses.
(i)Insurance and Tax Planning: A sound tax planning involves
utilization of various provisions of the statute that enables the
organization to reduce the tax liability without violating the
latter and spirit of the law. The treasurer must identify and
undertake such transactions that will result in
reduction/elimination of tax liabilities of the business.
(j)Internal Treasury Controls: The treasurer acts as a cashier;
undertakes the role of an authorized signatory on payment cheques
including the authority to approve such cheques. Even
reconciliation of relevant accounts is an important function of the
treasurer.
(k)Financing Decision: The financing decision relates to
mobilization of funds to ensure smooth business activity and
healthy growth of an organization.
The financing aspect involves decision-making about the
following:
How much to mobilize: The treasurer has to estimate the amount
of funds that will be required in future, and what part of this can
be met by funds generated internally and how much will have to be
mobilized from external sources.
From where/whom to mobilize: A firm has access to different
sources of finance, both long-term and short-term. The treasurer
has to decide which will be the most appropriate source of finance
for his firm.
At what costs: all funds have a cost associated with them (e.g.,
interest on loans, debentures, etc. dividend on equity). The
average cost of all the funds mobilized should be kept as low as
possible.
When to mobilize: the treasurer has to estimate when a shortfall
of funds will occur and raise funds accordingly.
l) Investment Decision: The funds generated in the course of
business need to be put to further use. The investment decision
relates to the selection of assets in which funds will be invested
by firm. The assets, which can be acquired, fall into two
categories- (i) long-term assets (ii) short-term or current assets-
defined as those convertibles into cash usually within a year.
Accordingly, asset selection decision is also of two types: (i)
the first involving long-term assets are popularly called capital
budgeting, and (ii) the second involving short-term assets or
current assets is popularly called working capital management.
A proper balance should be achieved between fixed and current
assets. The money manager has to decide which kind of funds
(long-term or short-term) should be used for financing either of
the two kinds of (fixed or current) assets.
NATURE OF TREASURY ASSETS AND LIABILITIES
Banks balance sheet consists of treasury assets and liabilities
on the one hand and non- treasury assets and liabilities on the
other. There is a clear distinction between the two groups. In
general, if a specific assets or liability is created through a
transaction in the inter-bank market and/or can be assigned or
negotiated, it becomes a part of the treasury portfolio of the
bank.
Treasury assets are marketable or tradable subject to meeting
legal obligations such as payment of applicable stamp duty, etc.
another characteristic of treasury assets is that they can (and
often are required to be marked to market. An example of treasury
asset/liability which is created by corporate/treasury
actions/decisions on funding/deployment but is not tradable, is the
Inter-bank Participation Certificate.
Loans and advances are specific contractual agreements between
the bank and its borrowers, and do not form a part of the treasury
assets, although these are obligations to bank. (They can however,
be securitized and sold in the market. If a bank were to take a
position in such securitized debts, it would become part of
treasury activity). On the other hand, an investment in G-Secs can
be traded in the market. It is, therefore, a treasury asset.
Treasury liabilities are distinguished from other liabilities by
the fact that they are borrowings from the money (or bond) market.
Deposits (current and savings accounts and fixed deposits) are not
treasury liabilities, as they are not created by market
borrowing.
List of Banks Treasury Products
A. Domestic Treasury
1. Assets Products/ Instruments:
Call/Notice Money lending
Term money Lending/Inter-bank Deposits
Investment in CDs
Commercial Paper
Inter-bank Participation Certificates
Derivative Usance promissory Notes/ Bankers or Corporate
Acceptances
Reverse Repos/CBLO- backed Lending through CCIL
SLR Bonds (notified as such by the RBI)
(a)Issued by the Government of India as securities and
T-bills
(b)Issued by State Governments
(c)Guaranteed by Government of India
(d)Guaranteed by State Governments
Non-SLR Bonds (issued by)
(a)Financial Institutions
(b)Banks/NBFCs (Tier II Capital)
(c)Corporate
(d)State-level Enterprises
(e)Infrastructure Projects
Assets-backed Securities (PTCs)
Private Placements
Floating Rate Bonds
Tax-free Bonds
Preference Shares
Listed/Unlisted Equity
Mutual Funds
2. Liability Products/Instruments
Call/Notice Money Borrowing
Term Money Borrowing
CD Issues
Inter-bank Participation Certificates
Repos/CBLO-backed Borrowing through CCIL
Refinance (RBI, SIDBI, NABARD, Exim Bank, NHB)
Tier II Bonds (issued by bank)
B.Foreign Exchange
1.Interbank
Spot Currencies
Cash
Tom
Forward and Forward-Forward (simultaneous purchase and sale of a
currency for two different forward maturities)
Foreign Currency Placements, Investments and Borrowings (in
accordance with RBI guidelines)
2.Merchant(Initiated In Branches, Arranged By Forex
Treasury)
Preshipment Foreign Credit (PCFC)
Foreign Currency Bills Purchased (FCBP)
Foreign Currency Loans (FCLs)/FCNR (B) Loans
Postshipment Foreign Credit (PSFC)
External Commercial Borrowing (ECB)
C.Derivatives
Interest Rate Swaps (IRSs)
Forward Rate Agreements (FRAs)
Interest Rate Options
Currency Options
D.Certain corporate assets such as investments in subsidiaries
and joint ventures are reckoned as treasury assets although they
are not traded and are permanent in nature.
TREASURY PRODUCTS & SERVICES
1. Forward Contract: It is a contract between the bank and its
customers in which the exchange/conversion of currencies would take
place at future date at a rate of exchange in advance under the
contract. The essential idea of entering into a forward contract is
to peg the price and therebyavoid the pricerisk.
ForwardRates=Spotrate+/? Premium/Discount
2. Forward Rate Agreement (FRA): An FRA is an agreement between
the Bank and a Customer to pay or receive the difference (called
settlement money) between an agreed fixed rate (FRA rate) and the
interest rate prevailing on stipulated future date (the fixing
date) based on a notional amount for an agreed period (the contract
period). In short, this is a contract whereby interest rate is
fixed now for a future period. The basic purpose of the FRA is to
hedge the interest raterisk.
For example, if a borrower is going to borrow FC loan for 6
months at LIBOR rate after 3 months, he can buy an FRA whereby he
can fix interestratefortheloan.
3. Interest Rate Swap(IRS) : It is a financial transaction in
which two counterparties agree to exchange streams of cash flows
throughout the life of contract in which one party pays a fixed
interest rate on a notional principal and the other pays a floating
rate on the same sum. The basic purpose of IRS is to hedge the
interest rate risk of constituents and enable them to structure the
asset/ liability profile best suited to their respective
cashflows.
4. Currency Swap: It is an agreement between two parties to
exchange obligations in different currencies at the beginning,
during the tenure and at the end of the transaction. At the start,
initial principal is exchanged, though not obligatory. Periodic
interest payments (either fixed or floating) are exchanged through
out the life of the contract. The principal is exchanged invariably
on termination at the exchange rate decided at the start of the
transaction. By means of currency swap, the counterparties can
reducethecostoffunding.
5. Option: It is a contract between the bank and its customers
in which the customer has the right to buy/sell a specified amount
of underlying asset at fixed price within a specific period of
time, but has no obligation to do so. In this contract, the
customer has to pay specified amount upfront to the counterparty
which is known as premium. This is in contrast of the forward
contract in which both partieshavea binding contract.
This is a facility offered to customers to enable them to book
Forward Contracts in Cross Currencies at a target rate or price.
This facility helps the customer to en cash the currency movements
in late European market, New York market and early Asian market.
The minimum amount of the contract is 250,000/- in respective base
currencies (for e.g. USD, EUR & GBP).
TYPES OF RISKS ASSOCIATED WITH TREASURY AND THEIR MITIGATION
Risk profile of the treasury activities consists of two broad
categories viz. Financial Risk and Operational Risk. Financial
risks include market risks (interest rate risk, price risk, basis
risk), credit risks, liquidity risks, etc. Operational risks
include systemic risk, compliance risk, legal risks, IT risks,
fraud risks, etc. For mitigation of such risks, various prudential
guidelines prescribed by the regulators and internal policies and
procedures laid down by the management are to be followed
1.Operational Risk: This covers the entire gamut of the
transaction cycle from dealing to custody. Operational risk can
again be divided into those arising from:
System deficiencies, authorizations, based on approved
delegation of powers, must integrate with work and document flows.
This ensures that individual payments and deliveries by the bank
are entirely deal/transaction supported;
Non-compliance with laid-down procedures and authorizations for
dealing, settlement and custody;
Fraudulent practices involving deals and settlements;
IT involving software quality, hardware uptime; and
Legal risks due to inadequate definitions and coverage of
covenants and responsibilities of the bank and counterparty in
contracts and agreements.
Mitigation
Dealers must operate strictly within the single deal, portfolio
and prudential limits set for the instrument and counterparty. Stop
loss and risk norms of duration and value at risk should be adhered
to all times.
No deviation from approved and implemented work and document
flows should be allowed.
The necessary authorizations must accompany documents as they
pass from one stage of the transaction cycle to the next.
Delegation of powers must be strictly adhered to. Deals or
transactions exceeding powers must be immediately and formally
ratified in accordance with management/board edicts on
ratification.
The prescribed settlement systems in each product/instrument and
market must be followed. Deviations from delivery and payment
practices should not be allowed.
Computer systems- hardware, networks and software should have
adequate backups. They should be put through periodic stress tests
to determine their ability to cope with increased volumes and
external data combinations.
Custodians creditworthiness is paramount in demat systems of
records of ownership and transfer. Custodial relationships should
be only with those with the highest credit rating.
Counterparty authorizations/powers of attorney must be kept
current.
The list of approved brokers should be reviewed periodically to
satisfy the banks credit standards and ethics. In equity
transactions, the broker is the counterparty. Settlement must be of
the delivery against payment type.
Deal, transaction and legal documentation should be adequate to
protect the bank, especially in one-off transactions and structured
deals.
2. Financial Risks: The following identifies and defines
individual financial risks:
(a)Credit Risk
The oldest of all financial risks in its simplest form, refers
to the possibility of the issuer of a debt instrument being unable
to honour his interest payments and/or principal repayment
obligations. But, in modern financial markets, it includes
non-performance by counterparty in a variety of off-balance sheet
contracts such as forward contracts, interest rate swaps and
currency swaps and counterparty risk in the inter-bank market.
These have necessitated prescribing maximum exposure limits for
individual counterparties for fund and non-fund exposures.
Mitigation
Better credit appraisal. Careful analysis of cash flows of the
business before investing.
Investing only in rated instruments
Risk pricing
Credit enhancement through margin arrangements, escrow accounts
etc.
Guarantees/letters of credit from rated entities
Adequate financial and/or physical assets as security
Exposure limits by counterparty, industry, location, business
group, on and off balance sheet
Diversification by industry, sector, location and so on
Exposure limits for individual bank counterparties for
funded/non-funded assets
Reputation and image of counterparties
Collateralization of transactions through repos
(b)Liquidity Risk
An asset that cannot be converted into cash when needed is
liquidity note which is the normal characteristic of the vast
majority of bonds.
There is also the risk of scarcity of funds in the market. This
could happen, for example, when the RBI deliberately tightens
liquidity, by increasing CRR, selling securities or forex. A third
situation is when a banks creditworthiness becomes suspect and
there are no willing lenders, even though there is no liquidity
shortage in the market.
Mitigation
Increase the proportion of investments in liquid securities
Increase the proportion of investments in near-maturity high
quality instruments
Maintain credit rating, reputation and image
Securitize loan portfolio of large as well as small
borrowers
(c)Interest Rate Risk(Balance Sheet):
This affects both the assets and liabilities of a bank. On an
overall basis, the maturity gaps between assets and liabilities
lead to the risk of a contraction of spreads if interest rates fall
and assets mature before liabilities or interest rates rise and
liabilities mature before assets.
Apart from interest rate risk originating from the disparity in
the maturities of assets and liabilities, there is also basis risk,
because interest rate determination may differ. For example, if
assets are MIBOR-linked (floating rate), while liabilities are
fixed rate and MIBOR falls, assets yields also do, compressing the
spreads.
Mitigation of basis risk will involve converting (in the above
instance) assets to fixed rate (or converting liabilities to
MIBOR-linked). Instruments used are interest rate swaps, futures
and FRAs.
(d)Interest Rate Risk (Investment/Trading Book):
The prices of bonds are affected by changes in interest rates.
When interest rates come down, their prices go up. The opposite
happens when interest rates rise. The most price-affected bonds in
response to rate movements are those of long maturity- indeed
maturity and price changes are strongly positively correlated.
Duration measures the price sensitivity of a bond to changes in
interest rates. Increasing duration makes the bond portfolio more
sensitive to interest rates while decreasing duration reduces
it.
As bond prices and interest rates are inversely related, if the
bank expects interest rates to fall, subject to market liquidity,
it will have to increase duration by buying long-dated securities.
Conversely, in anticipation of a rise in interest rates, the bank
will lower duration by selling long-dated securities.
(e)Value-At-Risk (VAR):
Value-at-risk indicates the possible maximum loss which will be
suffered in a specified period and at a specified confidence level
from a fall in the price of a security (or exchange rate), given
historic data on the price behavior of the security (exchange rate)
or assessment of likely future market movements. The concept is
applied to calculate the risk content of an individual security,
foreign exchange position, equity share or a portfolio of these
instruments.
(f)Forex (Market) Risk:
The forex market is probably the most consistently volatile of
all financial markets. While it offers enormous scope for making
profits, the other side of the coin is the risk of big losses from
unexpected swings in exchange rates. This necessitates and
effective forex risk management system involving:
1.Fixing exposure limits by currency and maturity
2.Continuous market monitoring with reference to the banks open
positions; and
3.Closing loss positions, if stop loss limits/VAR are
breached.
For supporting the above, it is necessary to have adequate data
gathering systems in place to measure currency wise exposures and
their maturities.
The following determine the forex risk exposure of the bank:
1.Open Positions
2.Gap (Interest Rate/ Swap) Risk;
3.Counterparty (Credit) Risk;
4.Settlement Risk;
5.Country Risk;
6.Value-at-Risk;
7.Operational Risk; and
8.Legal Risk.
(g)Settlement Risk:
Settlement risk arising from time differences between trading
zones, which may result in one of the parties to a transaction
having to settle ahead of the other party, i.e., debit and credit
are not synchronized. To some extent (but not completely), this is
mitigated by the exposure limits fixed for each inter-bank
counterparty.
(h)Country Risk:
Country risk is the possibility that a country or bank in a
country will not be able to honour obligations due to shortage of
foreign exchange or political risk.
The RBI has asked banks to measure monitor and control country
exposures. It requires specific responsibility and accountability
in the organization structures of the bank for country risk
management.
(i)Legal Risk:
Standard agreements govern forex contracts in the domestic and
international markets, the main being:
i.For spot and forward foreign exchange - International Foreign
Exchange Nostro Agreement (IFENA)
ii.Foreign Exchange Options International Currency Options
Agreement (ICOM)
iii.All others including Derivatives Internal Swap Dealers
Association Master Agreement ( ISDA Master Agreement)
Disputes and arbitration in international courts/tribunals will
be governed by covenants and obligations in the above
agreements.
(j)Operational Risk and Concurrent Audit:
As required by the RBI, the banks carry out concurrent audit of
all forex transactions. Auditors are required to give daily and
monthly reports covering:
Compliance with approved open position limit
Compliance with overnight exposure limits
Compliance with aggregate and individual gap limits
Compliance with value at risk norms.
RISK MANAGEMENT: RBI GUIDELINES/NORMS
The RBI has circulated detailed guidance notes on Market Risk
Management, Asset Liability Management and Credit Risk Management.
According to these,
(a)Banks are required to send monthly reports covering liquidity
mismatches and interest rate sensitivity.
(b)Banks are required to pay special attention to liquidity risk
and management and monitor the following:
Call Borrowing/Lending
Purchased Funds vis--vis liquid Assets
Core Deposits vis--vis Core Assets, i.e., CRR, SLR and Loans
Duration of Liabilities and Investments
Maximum Cumulative Outflows across all time bands
Commitment Ratio on and off B/S
Swapped Funds Ratio, i.e., extent of liabilities from forex
sources.
RISK MANAGEMENT IN BANKS
a)Banks have an Assets-Liability Management Committee (ALCO),
which manages gap, interest rate, liquidity and currency risks of
the treasury and non-treasury balance sheets.
b)The banks submit monthly statements to the Board and RBI on
liquidity mismatches and interest rate sensitivity.
c)Stop loss levels are fixed for both SLR and non-SLR
securities.
d)Bank undertakes concurrent audits of securities and funds
management transactions. These findings/reports are put up to the
Audit Committee of the Board every quarter.
e)The investment committee reviews the investment portfolio
every half-year, with emphasis on rating migration and portfolio
quality.
f) The treasury Department is subject to periodic
inspection.
g)The panel of brokers is reviewed annually.
h)The software package used by treasury is system-audited at
regular intervals to test its ability to cope with new products and
instruments, scale of operations and outlying data and
conditions.
i) The functions of front-office, settlement back-office,
mid-office and accounts are completely segregated.
j) Deals are backed by deal slips, and office memos containing
approvals by competent authority.
k)Defaults/arrears in interest/principal on bonds are monitored
and reported to appropriate authorities.
l) A bank will fully comply with all the RBIs guidelines,
regulations and rules governing the investment portfolio.
m) The RBI has now finalized norms for risk-based internal audit
system from the first quarter of 2003.
FUTURE SCOPE/CHALLENGES IN TREASURY MANAGEMENT
Treasury Management is increasingly being viewed as a
specialised function in many corporate companies, and has already
been assigned a separate status from the general financial
functions. Treasury management asks for expertise on capital
markets, money markets, instruments & investment avenues,
treasury & risk management and related areas. In this
increasingly integrated and interdependent financial environment,
the links between money and capital markets have become extremely
close. To better understand this inter-linking and manage business
in a better way, firms are hiring persons who can handle Treasury
Management and forecast rates accurately.
Career Prospects in Treasury Management:
India is changing from an economy with strong socialistic
leanings to a free-market one where the barriers to trade, both
domestic and international, are fast vanishing. The transformation
process that began in the early 1990s has been put into overdrive.
While foreign firms are busy trying to get a foothold on Indian
soil, Indian companies do not lag behind in attempting to penetrate
foreign markets. There has been an unexpected rise in exports as
well as imports, which has resulted in volatile exchange rates and
more financial constraints. Given the inconsistency of exchange
rates, the corporate and banking worlds are paying greater
attention to treasury and foreign exchange management. Careers in
treasury and forex management have suddenly been pitch-forked into
the limelight. Banks have been scouting campuses of Indian
B-schools with a view to recruiting for their treasury and forex
functions.
Opportunities chiefly exist in the areas of:
Corporate Finance: Many Indian corporate are doing business
internationally. They are also raising funds abroad, exposing them
to greater risk due to deregulation of interest and exchange rates.
To minimize these risks, it is necessary to handle forex and
treasury related functions carefully. If neglected, it may lead to
profit erosion. Corporate are on the look out for people with
professional qualifications to handle all aspects pertaining to
treasury and forex management.
Banks and other Financial Institutions: Volatile exchange rate
regimes and fickle interest rates are posing stiff challenges to
financial institutions and banking organizations. They are also
being offered myriad opportunities with the inter-linking of
financial markets. Inconsistencies in lending rates require
continuous monitoring and management of the asset-liability gap of
these institutions. Clients are transacting more and more business
with banks in foreign currencies. Thus, banks and financial
institutions are also seeking professionally qualified persons to
look after the treasury and forex management functions.
Treasury and Forex Consultancy: Corporate and banks are roping
in experienced professionals as consultants for risk management.
Opportunities as consultants are not only well paid but also
satisfying. However, these positions demand sound experience. It is
very natural to be curious about the kind of openings or careers
that Treasury and Forex
Management offers. Some of them are:
a. Treasury Analyst
As a Treasury Analyst, you will support the Cash Management and
Capital Markets department of the company. The candidate is
expected to have a degree in business/finance and should
demonstrate advanced analytical and system skills. He should be
able to use these skills to develop sophisticated models and apply
them to the treasury and accounting systems. Exposure to treasury
workstation, ledger system, reporting and billing systems is an
additional advantage.
b. Functional Support Analyst
Functional Support Analysts are responsible for directly
supporting treasury workstation functions. This includes modifying
existing processes, clinching new business deals, reviewing old
processes, upgrading systems, maintaining database, research of
accounting data, end user training, and security control. They are
also responsible for the documentation of all support processes.
Financial
Support Analysts will also respond to client support requests by
resolving and diagnosing problems, and escalate (refer) complex
ones to appropriate levels of expertise. They also maintain
knowledge about Treasury banking systems and will serve as back-up
support.
c. Cash Analyst
Cash Analysts are responsible for everyday cash management for
the company and its subsidiaries. They are also responsible for
bank charge analysis, troubleshooting of credit card and direct
debit problems as well as maintaining a database of quarterly and
ad-hoc payments made. They will also serve as support to Treasury
Operations, and assist in credit card charge backs and drafting of
monthly reports. Cash Analysts will also follow up on sales and
refinance distributions from partnerships.
d. Treasury Analyst-Business Solutions
In this capacity, treasury analysts will act as visionaries for
world class business process reengineering. They will focus their
efforts on creating a world-class treasury organization through
documentation of business process flows and analysis of Treasury
functions. They will analyze the benefits of using existing and
future platforms to ensure that the Treasury Organisation is an
enterprise solution and is compatible with existing Treasury
processes and requirements. They also use their knowledge of
treasury/business functions in association with IT experience to
transform business requirements into software solutions.
e. Trade Specialist
The Trade Specialist provides support to Investment Managers and
Clients through timely and accurate processing of trade
instructions and related transactions. The varieties of trade
instructions that require daily processing include global and
domestic securities, derivatives, foreign exchange transactions and
transfer of currency between accounts. They will maintain and
strengthen the accounts relationship while minimizing risk and
maximizing profitability. They= will assist in the investment of
cash and the research of currency balances, idle and overdrawn
balance and the resolution of trade problems to ensure accurate
client statements.
ROLE OF INFORMATION TECHNOLOGY IN TREASURY MANAGEMENT
1.Negotiated Dealing System
Negotiated Dealing System (NDS) is an electronic platform for
facilitating dealing in government securities and money market
instruments.
The Indian debt market has gone through sweeping changes with
the introduction of the Negotiated Dealing System (NDS). This is an
electronic trading platform for the following instruments:
Government of India Dated Securities
State Governments securities
T-bills
Call/Notice/Term Money
Commercial Paper
Certificates of Deposit
Repos
Membership of the NDS is open to all institutions which are
members of INFINET and have Subsidiary General Ledger (SGL)
accounts with the RBI. At present, this covers the following:
Banks
Financial Institutions
Primary Dealers
Insurance Companies
Mutual Funds
Banks and Primary Dealers are obliged to become members of the
NDS. NDS facilitates electronic submission of bids/application by
members for Primary issuance of government securities by RBI
through auction and floatation. The system of submission of
physical SGL transfer form for deals done between members on
implementation of NDS has been discontinued. NDS also provides
interface to Securities Settlement System (SSS) of Public Debt
Office, RBI, and thereby facilitating settlement of transactions in
Government Securities including treasury bills, both outright and
repos.
NDS use INFINET, a closed user group network as communication
backbone. Hence, membership to the NDS is restricted to members of
INFINET. Membership of INFINET entails holding SGL and/or current
account with RBI or as may be prescribed from time to time.
2.Other Trading Platforms/System
Trading is done electronically through networked
computers/workstations. Market participants and players are part of
secure WAN and make bids and offers, be it forex, bonds or
equities. The system electronically matches bids and offers.
Current examples of electronic trading platforms are those of NSE,
BSE and foreign exchange (through the Reuters electronic dealing
system).
3.Straight-through-processing (STP)
STP is latest technological wave to hit financial markets. This
electronic system enables trading, documentation, clearing,
settlement, and custody on a single, end-to-end hardware and
software platform.
This is a natural extension of electronic trading whereby
individual traders, once approved and authorized by the buyer and
seller, are settled automatically by the system through its
connectivity with a Clearing House. Buyers receive securities in
their custodial accounts and sellers receive funds.
4.Electronic Form
a. Settlement: Post-approval of a deal, the system suo motu,
credits and debits the respective cash and securities accounts of
the buyer and seller as required. In G-Secs, the NDS enables this
through the intermediation of the CCIL.
Forex deals in USD/INR and cross-currencies, i.e., USD/JPY,
Euro/USD, GBP/USD, etc., are also settled electronically through
CCIL or SWIFT, through transfers of funds from and to Nostro
accounts.
b. Custody: Electronic records of ownership of securities are
held by DPS. Such securities do not exist in physical form. The SGL
depository of the RBI maintains custody and ownership of SLR
securities in electronic form.
c. Conversion of Physical Securities to Demat: The RBI and SEBI
have now made it mandatory for almost all securities to be in
demat, i.e., electronic record of ownership and transactions in
securities, maintained with a depository participant (DP), which,
in turn, maintains an account with the apex depository (NSDL,CDSL,
etc.)
Similarly, Real Time Gross Settlement [RTGS] has already been
introduced, which is a completely electronically propelled
countrywide payment system.
Besides the above the application of sophisticated IT tools has
made it possible to calculate VaR, conduct thousands of scenario
analysis through simulation, carry out back testing/stress testing,
and apply statistical tools for complicated analysis in bond
dynamics and exchange rate mechanisms.
CASE STUDY ON STATE BANK OF INDIA
TREASURY
Profile
Profile India's largest bank is also home to the country's
biggest and most powerful Treasury, contributing to a major chunk
of the total turnover in the money and forex markets. Through a
network of state-of-the-art dealing rooms in India and abroad,
backed by the assured expertise of informed professionals, the SBI
extends round-the-clock support to clients in managing their forex
and interest rate exposures.
SBI's relationships with over 700 correspondent banks are also
leveraged in extracting maximum value from treasury operations.
SBI's treasury operations are channeled through the Rupee Treasury,
the Forex Treasury and the Treasury Management Group.
The Rupee Treasury deals in the domestic money and debt markets
while the Forex Treasury deals mainly in the local foreign exchange
market. The TMG monitors the investment, risk and asset-liability
management aspects of the Bank's overseas offices.
RUPEE TREASURY
The Rupee Treasury carries out the banks rupee-based treasury
functions in the domestic market. Broadly, these include asset
liability management, investments and trading. The Rupee Treasury
also manages the banks position regarding statutory requirements
like the cash reserve ratio (CRR) and the statutory liquidity ratio
(SLR), as per the norms of the Reserve Bank of India.
Products and Services
Asset Liability Management (ALM): The ALM function comprises
management of liquidity, maturity profiles of assets and
liabilities and interest rate risks.
Investments: SBI offers financial support through a wide
spectrum of investment products that can substitute the traditional
credit avenues of a corporate like commercial papers, preference
shares, non-convertible debentures, securitized paper, fixed and
floating rate products. SBI invests in primary and secondary market
equity as per its own discretion.
These products allow you to leverage the flexibility of
financial markets, enable efficient interest risk management and
optimize the cost of funds. They can also be customized in terms of
tenors and liquidity options.
SBI invests in these instruments issued by your company, thus
providing you a dynamic substitute for traditional credit options.
The Rupee Treasury handles the banks domestic investments.
Trading
The banks trading operations are unmatched in size and value in
the domestic market and cover government securities, corporate
bonds, call money and other instruments. SBI is the biggest lender
in call.
FOREX TREASURY (FX)
The SBI is the countrys biggest and most important Forex
Treasury, both in the Interbank and Corporate Foreign Exchange
markets, and deals with all the major corporate and institutions in
all the financial centers in India and abroad. The banks team of
seasoned, skilled and professional dealers can tailor customized
solutions that meet your specific requirements and extract maximum
value out of each market situation.
The banks dealing rooms provide 24-hour trading facilities and
employs state-of-the-art technology and information systems. SBIs
relationships with over 700 correspondent banks and institutions
across the globe enhance the strength of the Forex treasury. The FX
Treasury can also structure and facilitate execution of derivatives
including long term rupee-foreign currency swaps, rupee-foreign
currency interest rate swaps and cross currency swaps.
OVERSEAS TREASURY OPERATION
Treasury Management Group
The Treasury Management Group (TMG) is a part of the
International Banking Group (IBG) and functions under the Chief
General Manager (Foreign Offices). As the name implies the
department monitors the management of treasury functions at SBIs
foreign offices including asset liability management, investments
and forex operations.
Products and Services
Asset Liability Management (ALM): The ALM function comprises
management of liquidity, maturity profiles of assets and
liabilities and interest rate risks at the foreign offices.
Investments: Monitoring of investment operations of the foreign
offices of the bank is one of the principal activities of TMG. The
main objectives of investment operations at our foreign offices,
apart from compliance with the regulatory requirements of the host
country, are (a) safety of the funds invested, (b) optimization of
profits from investment operations and (c) maintenance of
liquidity. Investment operations are conducted in accordance with
the investment policy for foreign offices formulated by TMG.
The activities include appraisal of the performance of the
foreign offices broad parameters such as income earned from
investment operations, composition and size of the portfolio,
performance vis--vis the budgeted targets and the market value of
the portfolio.
Forex monitoring: Monitoring of forex operations of our foreign
offices is done with the objective of optimizing of returns while
managing the attendant risks.
Forex and Interest rate (Foreign Currency) derivatives: TMG also
plays an important role in structuring, marketing, facilitating
execution of foreign currency derivatives including currency
options, long term rupee - foreign currency swaps, foreign currency
interest rate swaps, cross currency swaps and forward rate
agreements. Commodity hedging is one of the recent activities taken
up by TMG.
Reciprocal Lines: The department is also responsible for
maintenance of reciprocal lines with international banks.
PORTFOLIO MANAGEMENT & CUSTODIAL SERVICES
The Portfolio Management Services Section (PMS) of SBI has been
set up to handle investment and regulatory related concerns of
Institutional investors functioning in the area of Social Security.
The PMS forms part of the Treasury Dept. of SBI, and is based at
Mumbai.
PMS was set up exclusively for management of investments of
Social Security funds and custody of the securities related
thereto. In the increasingly complex regulatory and investment
environment of today, even the most sophisticated investors are
finding it difficult to address day to day investment concerns,
such as
Adherence to stated investment objectives
Security selection quality considerations
Conformity to policy constraints
Investment returns
The team manning the PMS Section consists of highly experienced
officers of SBI, who have the required depth of knowledge to handle
large investment portfolios and address the concern of large
investors. The capabilities of the team range from Investment
Management and Custody to Information Reporting.
OVERALL FINDING OF THE STUDY
The project has given an insight into the various aspects of
treasury management namely
Meaning and definition of treasury management.
Different functions of treasury departments in banks like
reserve management& investment, liquidity & fund
management, assets liability management, etc.
Organisational structure & objective of treasury
management
Element of treasury management and functions of treasurer in
these elements.
Nature of treasury assets and liabilities, treasury products and
services, risk associated in treasury, their mitigation and RBI
guidelines for risk management.
Future scope in treasury management and role of information
technology in treasury management.
SBI,s treasury. SBI is the first treasury operator.
SBI bank has an integrated treasury management; they dont have
any competitors as such because it is well maintained and
functioned.
SBI has their own procedure for treasury management which is
followed very well by them. Percentage of income is not disclosed
by them to any one. SBI do follow RBI guidelines for treasury
management properly which they think that it is well
formulated.
Risk involved in treasury management for SBI is the same like
operational risk and financial risk and they aim for a well
integrated and innovative management of treasury with low risk and
proper function of treasury assets and liabilities. It also has
good career opportunities.
LIMITATION OF THE STUDY
Time allotted for making project is very limited. As study is
restricted only to a specific area. If time permits then there
would be a vast scope of study of different organizational treasury
management or having a comparative study between two banks.
Study allotted has a page constraint. The information required
for in-depth study is not possible.
Due to lack of work experience, there is a disadvantage for
making a project as there is no in-depth practical information of
the subject. If there would be work experience, the project would
have been of practical information.
Treasury management has awareness among the banking sector only
which restricts from getting information from public.
There is no space horizon. So study on treasury management is
restricted only to Indian scenario. So we cant have a comparative
study with other countries.
CONCLUSION
Historically, the treasury operations were oriented more toward
compliance of the regulatory prescriptions in terms of cash reserve
ratio and statutory liquidity ratio. Ensuring that there are no
defaults in central bank account and that the borrowings are
minimal were the focal issues addressed to. With the globalization
process, the role of treasury has undergone a sea change and it is
a major profit center for better performing banks.
Treasury operations have become more significant and complex
today than what it was few years back. The role played by the
technology and the rapid changes in the financial sector has
brought in more flexibility in the funds deployment by banks. The
dynamism with which the Treasury Market moves needs to be fully
understood which is integrated in the Banks.
The role of information technology is pivotal particularly
because huge funds are handled by comparatively a few people in
each bank. Unless informational expectations are clarified and met
with, treasury operations can seldom be successful in terms of
revenue acceleration.
To sum up, the paradigm shift in the risk exposure levels of the
financial institutions, has definitely led to treasury management
assuming a center stage. Undoubtedly all financial institutions
need to perform treasury management. But to have a proper treasury
management function in place, a thorough understanding of the
various operations on its assets/ liabilities becomes essential.
Such an understanding will enable the financial institution to
identify and unbundle the risks and further aid in adopting and
developing appropriate risk management models to manage risks.
BIBLIOGRAPHY
BOOKS
?Transformation Of Indian Banks With Information Technology
-Prof. Sharad Padwal & Dr. Vasant Godse
?Theory And Practice Of Treasury And Risk Management In
Banks
-Indian Institute Of Banking & Finance (Taxman)
?Treasury Management
-Indian Institute Of Banking & Finance (Taxman)
INTERNET
?www.indiainfoline.com
?www.investopedia.com
?www.treasury-management.com.
?www.financialexpress.com
?www.google.com
ANNEXURE
QUESTIONNAIRE
1)Treasury management relates to
a.Managing assets and liabilities of treasury
b.Managing deposits and advances
c.Managing working capital
d.Managing foreign currency
2)Does your bank have an integrated organization structure?
Yes: No:
3)Do you have competitors for treasury management operation?
Yes:No:
4)Are procedures for treasury management operation in banks
different from other organization? If yes how?
Yes: No:
5)What is the percentage of income SBI gains from treasury
management operation?
a.50 %
b.40 %
c.70%
d.If any other, kindly specify
6)Does SBI follow the RBI guidelines for treasury
management?
Yes: No:
7)Do you think are RBI guidelines very strictly formulated? If
yes, why do you feel so?
Yes:No:
8)What is your suggestion for the above?
9)Are there career opportunities in treasury management?
Yes: No:
10)What are the different risks involved in treasury management
in your bank while compared to other banks or organization?
11)What is your aim for future challenges relating to treasury
management?